Ethan A. Caldwell - Founder, Chief Administrative Officer, General Counsel and Secretary Russell C. Horowitz - Founder, Chairman, Chief Executive Officer and Treasurer Michael A. Arends - Chief Financial Officer.

Ross Sandler - Deutsche Bank AG, Research Division Rohit Kulkarni - RBC Capital Markets, LLC, Research Division Darren Aftahi - Northland Capital Markets, Research Division Gene Munster John Campbell - Stephens Inc., Research Division.

Good afternoon, my name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Marchex Second Quarter Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Ethan Caldwell, General Counsel..

Thank you. Good afternoon, everyone, and welcome to Marchex's business update and second quarter 2014 conference call. Joining us today are Russell Horowitz, Chairman and Chief Executive Officer; Peter Christothoulou, President; Michael Arends, Chief Financial Officer; and Dennis Cline, Director.

During the course of this conference call, we will make forward-looking statements that involve substantial risks and uncertainties.

All statements, other than statements of historical fact included on this call regarding our strategy, future operations, future financial position, future revenues and other financial guidance, acquisitions, projected costs, prospects, plans and objectives of management are forward-looking statements.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed on the forward-looking statements we make.

There are a number of important factors that could cause Marchex's actual results to differ materially from those indicated by such forward-looking statements as are described in the Risk Factors section of our most recent periodic report and registration statement filed with the Securities and Exchange Commission.

All of the information provided on this conference call is as of today's date, and we undertake no duty to update the information provided herein. During the course of this conference call, we will also reference certain non-GAAP measures of financial performance and liquidity.

A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in today's earnings release, which is available on the Investor Relations section of our website, and the definitions of these measures as used by us and the reasons why we believe these measures provide useful information are also contained in today's earnings release.

At this time, I would like to turn the call over to Russell Horowitz..

Thank you, Ethan. And thank you, everyone, for joining today's conference call. Marchex continued to make significant progress in the second quarter. We delivered strong performance for our clients, which resulted in another record revenue quarter for our Call-Driven business. Staying laser-focused on our client success is a key driver of this momentum.

Performance is truly at the core of everything we do. From the people we hire to the technologies we build, our client success is the access on which we operate. We believe advertisers should know exactly how their dollars can drive the best consumer outcomes in mobile.

Increasingly, the market is responding and our progress this year is a reflection of the performance we are driving for our clients. More advertisers are demanding transparency and measurability with our mobile ad campaigns and our growth is accelerating because our technology solves these difficult and complex problems.

Before diving into greater detail, I want to take a moment and talk about a few important trends that are contributing to our growth. Without question, the most transformative of these is the explosion of phone calls to businesses from mobile devices. If you look around, mobile is now the channel for carrying out so many aspects of daily life.

This means that when consumers want a product for service, they immediately turn to their phones to search for it. BIA/Kelsey recently forecast that consumers will make more than 70 billion calls to businesses from mobile search by 2018.

Considering the usage of apps, maps and other sources, we believe this overall market could be significantly larger.

In response to this tectonic shift in consumer behavior, advertisers are increasingly moving budgets towards mobile to connect with more mobile consumers, and may need the right strategies to maximize the return on investment in this channel. Lastly, advertisers are recognizing that a phone call is the primary outcome of mobile search.

We have the data generated from millions of calls. Advertisers are experiencing significant increases in inbound call volumes to their call centers and it's a direct result of their mobile ad spending. This trend, combined with growing demand from advertisers to make their mobile campaigns perform, is forming the backbone of this new market.

At Marchex, I believe very early on, that calls would be the currency of mobile performance advertising, much like clicks were on the desktop. But as we've learned over the years, not all calls are equal, just like all clicks aren't equal.

For instance, letting bad calls or spam go through to advertisers has a real cost and negatively impacts the return on investment. This is why we've invested significantly in technology that determines call quality for advertisers.

Understanding quality phone calls and to be clear, we define quality as customer calls with real purchase intent is a hard problem to solve.

You can get a sense for the complexity just by asking the basics, such as what are the telltale characteristics of spam calls? How do you differentiate between a robo dialer, a telemarketing call or a wrong number? How do you eliminate these calls automatically before they reach a business? And how do you make sure your technology keeps pace with spammers, who are constantly mutating their methods? These are the questions that led us to build and create patented spam blocking technology known as Clean Call.

This is just one example of how being early to the market has afforded us years to uncover and create solutions for problems we didn't even know existed until we are down the path of defining a quality phone call.

We believe that understanding call quality is a critical differentiator that gives Marchex a proprietary edge in this emerging and evolving market.

Because our Call Analytics technology differentiates between high-quality and low-quality leads of scale, we can provide highly sought-after intelligence for advertisers who need more transparency and measurability into how their mobile app campaigns perform as they look to increase their spending in this channel.

Furthermore, our technology drives and analyzes phone calls for more than 100,000 advertisers and our reach extends across dozens of industries, more than 100 supply sources and hundreds of millions of calls. Having both the call marketplace and Call Analytics solution has created a virtuous ecosystem effect.

Because we can follow the consumers path from a mobile ad to their conversations with call centers or businesses, we can give advertisers a cohesive solution that continues to evolve as new challenges and opportunities emerge. As a result, Marchex now leads in solving measurement and attribution in mobile through phone calls.

The integral role we play in our clients' success has inspired us to build such products as Call DNA, which creates an automated map of the conversation as the customer talks to an agent. For businesses with hundreds or thousands of local branches and representatives, Call DNA offers a new view into which locations close the most sales.

In fact, because our technology examines data and conversations with the granularity that it does, we've identified industry trends that many experienced advertisers in these protocols don't know about, even though they spend billions of dollars to drive calls. Take the auto industry. One of the largest advertising categories in North America.

A recent analysis by the Marchex Institute found that 16% of calls to dealerships go unanswered. When customers do connect with the dealer, 2/3 of the time, there is no attempt to get customers to make an appointment or get their contact information.

This presents a tremendous opportunity for auto advertisers to better understand how to convert their prospects into customers. It's exactly these kinds of insight that make us so valuable to our clients and why we've successfully become a part of the strategic ad buying process for many large advertisers.

We're now building out the formula to extend this approach with new and existing advertisers who we believe have significant potential. The second quarter is further evidence of our ongoing progress.

During the quarter, we initiated new relationships with Fortune 500 advertisers such as T-Mobile and continued to penetrate other existing national advertisers like DISH and Verizon. And as we grow, we're gaining recognition as leaders in our space.

Over the last several years, we have transformed our business by focusing on delivering quality calls to advertisers. Because Marchex identified this opportunity early, we believe we have built a meaningful lead in this emerging market. We spent the last 4 years hiring the right people and building the right technology to execute on this opportunity.

And with that, I'll hand the call over to Mike to cover the financials..

Thanks, Russ. For the second quarter, Call-Driven and other related revenues were $45.9 million, while total revenue was $49.7 million, including $2.2 million in domain sales. The second quarter represented another record in Call-Driven revenue.

We continue to see strong sell-through into existing advertisers, as well as continued progress in growing our pipeline. Both of these dynamics contributed to our strong year-over-year growth and to the increase in financial guidance today.

Furthermore, as we continue to execute for our largest advertisers at a new scale, we are building the formula to replicate with other advertisers in the future. We feel good about our progress so far this year. For the second quarter, including domain sales, Archeo revenue was $3.8 million. Domain sales were $2.2 million during the quarter.

Total operating costs were $44.9 million for the second quarter of 2014. This total reflects continuing operating costs and excludes stock-based compensation, acquisition and separation costs and amortization of intangible assets. Sales and marketing costs, excluding stock-based compensation, were $2.6 million.

Over the coming periods, we expect our marketing expense may modestly increase from current levels in support of continued growth of our sales and customer support teams. Moving to adjusted operating income before amortization and EBITDA from continuing operations. Call-Driven adjusted OIBA and EBITDA were $2.9 million and $3.8 million, respectively.

Including domain name sales, total adjusted operating income before amortization from continuing operations for the second quarter was $4.8 million and adjusted EBITDA was $5.7 million. Excluding domain sales, total adjusted OIBA and EBITDA was $2.6 million and $3.5 million, respectively.

GAAP net income from continuing operations was $947,000 for the second quarter of 2014 or $0.02 per diluted share. This compares to a GAAP net loss from continuing operations of $354,000 for the same period of 2013, or $0.01 per diluted share.

Including domain name sales, adjusted non-GAAP income per share from continuing operations, an estimate some Wall Street investors utilize as a supplemental measure of our operating progress, was $0.07 per share and $0.04 per share, excluding domain sales.

During the second quarter, we generated $3.3 million in operating cash flow and had more than $74 million in cash on hand as of June 30, 2014. We added $32 million in early April as part of our secondary offering, which contributed to our cash balances for the quarter. Now turning to our updated outlook for 2014 in the third quarter.

Consistent with prior quarters, given the relative contribution of our Call-Driven products, we believe focusing on Call-Driven revenues and profitability measures is the most appropriate way to communicate our business progress and guidance going forward. Looking first at our updated Call-Driven revenue guidance for 2014.

For the year, we are raising our forecast for Call-Driven revenue to $178 million or more, which represents 32% growth over 2013. Additionally, for the third quarter of 2014, we anticipate Call-Driven revenue of $46 million or more.

While advertiser budgets can change and we can experience period-to-period variability based on a variety of factors, we are excited about the progress we are making in our business. We are growing budgets with existing advertisers and continue to on-board new customers as we build a pipeline for future growth.

Furthermore, the visibility in our business is increasing as we further entrench ourselves with our customers through deep integrations. This success, in turn, creates a roadmap to win and scale new customers over time. Next, looking at Call-Driven adjusted OIBA and EBITDA margins.

For 2014, we are projecting $10 million or more in Call-Driven adjusted OIBA and $14 million or more in Call-Driven adjusted EBITDA. This guidance implies year-over-year Call-Driven adjusted OIBA growth of nearly 60% and reflects fully burdened Call-Driven results under a standalone model.

These amounts exclude any contribution from the Archeo assets in domain sales. For the third quarter, we anticipate a range of $2.5 million to $3 million in Call-Driven adjusted operating income before amortization and a range of $3.5 million to $4 million in Call-Driven adjusted EBITDA.

We're highly focused on capitalizing on our early mover advantage and performance-based call advertising, given the potential size of this market, and we're continuing to invest to support our growth opportunity.

We continue to look at ways to invest in our sales force and to invest in building our technology and support our partners as they expand their footprint with us in 2014.

While we believe there is significant margin leverage in our business over the long-term, we are focused on becoming leaders in this emerging market and supporting the momentum in our call business in the near term. With that, I'll hand the call back to Russ..

Thank you, Mike. I want to take a moment to thank our employees who solve hard problems every day to make mobile and call advertising work for our customers. Our approach is unique and customer-centric. It's creating the path to long-term growth and we're excited about the progress we're making.

We believe we're still in the early stages of our opportunity and we look forward to updating you more throughout the year. With that, operator, I'd like to turn it back to you to take questions..

[Operator Instructions] Your first question is from Ross Sandler with Deutsche Bank..

Russ or Mike, just a couple of questions.

First, can you just give us an update on the pipeline, particularly how things are ramping on the agency side of the business? And as we look out to 2015, 2016, do you expect to have other service level agreement type customers similar to what you have with Allstate in the hopper by then? And then the second question is just Call DNA has been out in the market for a couple of quarters.

Can you just talk about the adoption rate or some of the uptake that you're seeing from that product?.

Sure. Thanks for the questions, Ross. At this point, we feel like we have a pretty good lens on the mobile opportunity with performance advertisings and calls really are the currency in this space. So when we look at kind of the adoption, you asked about agencies. We think it's early.

But we see good penetration and opportunities for that to accelerate and to be growth catalyst, particularly in '15 forward. So we're feeling good about that. And when you look at the way we develop customer relationships, and other folks that could be similar to the way Allstate evolved into a meaningful customer and we've got a variety of others.

We do see an increasing number of folks who have those characteristics. And so, we feel good about that and as the combination of both the agency, relationships and efforts combined with the direct efforts are setting a foundation to support our higher levels of growth this year and set the stage for ongoing growth catalyst as well.

And on Call DNA, it's early, the indications have been strong. We think there's a lot of opportunity with this as part of our analytics functionality, as well as our ability to deepen and penetrate existing customers..

Your next question is from Rohit Kulkarni with RBC Capital Markets..

Quick question on -- as in your go-to-market strategy on national versus local -- as in how has that evolved or where are you spending more or less time or effort, whether it be for any specific verticals or otherwise, and I have a couple of follow-ups..

Sure. Thanks for the questions. We look at the national -- the national brands as direct relationships, whether it's directed through their agencies.

On the local customer front, we work with vertical resellers, market-leading resellers, whether it's folks like Zillow in the real estate category or Cobalt in the auto space as examples, where we can offer our functionality in terms of Call Analytics and marketplace to be a complement to their relationships. That continues to be our strategy.

When we think about the opportunity, we focus on what we call call-center categories. Right now, there's more than 10 of those. Over time, we think there's a couple of dozen. That include autos, real estate, home services, financial services, insurance, would all be examples of that.

So that continues to be our strategy and the areas that we think are most right for accelerating adoption of call-based advertising in mobile..

Okay. And a couple of questions for Mike.

As in you talked about visibility of the business has been pleasing as in -- any additional color you can give along those lines? As in any color along the lines? As in how -- what percentage of your forward looking growth you think is going to come from existing versus new customers? And secondly, on the marketing investments or spend that you hope to increase from current levels, where are you hoping to deploy the marketing materials people in any specific product or DNA or just increasing -- doing more of the same or same old things..

So let's start with the second question you have in terms of some of the difference -- selling and marketing initiatives that we have in place in the go-forward plan.

And I think the key for us is actually adding more people to the team and in particular, getting more experienced and seasoned folks that can work from a business development standpoint, especially with the direct large national type of customers and going through a process, then it sometimes takes several months or cycles to work through and knowing that there's an annual budget cycle season with many of these large national advertisers, that you have to work through and get into, as part of a planning process.

I think from a selling perspective, adding those kind of team members, in particular, adding experienced team members that have worked through some of those cycles in the past is a key initiative for us on a go-forward plan. In terms of the products, yes.

It's very much messaging some of the thematic things that are going on about our call marketplace and just the opportunity there with the mobile opportunity and the performance as part of that and just the results that some of our existing advertisers are getting, as well as on-boarding and working with some of the new potential customers in the pipeline.

From a -- just a visibility perspective. I think one of the things that we've seen and this has happened over the course of the last 2, 2.5 years.

Each time we get a little bit further along the continuum and engaging with the customer and getting them to feel more feedback in terms of consistency of the returns that we are bringing to the table for them, the type of new customer acquisition programs and that level of consistency that's providing them their return on investment, that's helping us get stronger trust and entrenchment and deeper integrations with them and engaging more with some of our analytics and intelligence functions.

And what's that doing over time is enabling them to give us more visibility because of the consistency of the return on investment they're getting. They're getting more comfortable with giving us further visibility out into the future with their plans, spends and their campaigns. And that's happening from our existing customer base very much to date.

Not so much with new customers because those do take time to work through and entrench and build that trust and relationship, but it does appear that things are moving in a very positive direction on both fronts right now..

Great. And quickly on Call DNA as follow-up to Ross' question. So would it be fair to characterize that it is still very early in terms of actually making real dollars flow through for any Call DNA sales? It is just mostly -- you're probably giving away that for free for people to start using it, testing it and make the relationship even more sticky..

Yes. Very much in some cases. It's integrated into some of the products and the trials that we're working on. We do very much view it as early stage, but the feedback so far has been very positive for the customer programs that we've been working with..

Your next question is from Darren Aftahi with Northland Securities..

Just a few. You called out T-Mobile on the call in terms of a new customer.

Can you expand if that was a direct or agency relationship and then maybe just calling out, any specific verticals where you saw particular strength in the quarter and perhaps, sort of top 3 or 4 customer revenue concentration?.

Yes. On the customer front, we aren't necessarily breaking down whether it's T-Mobile and others, which are coming from the agency or direct.

In the context of the verticals, we see strength continuing to play out in the ones I referenced before when you think about autos, real estate, financial services, home services, travel's emerging, telecom is starting to be significant when you look at customers like Sprint. So those would be some of the noteworthy ones..

And then sort of top 3 customers by revenue concentration..

Top 3 customers are still consistently the same. So we've got some of the small business customers through the YP relationship. We've got Allstate and ADT security, are still key components and opportunities, hopefully for more in the future..

Great.

And then my last one, any update you can give on some of the, maybe, beta you've been doing in the social channels? Any kind of progress there?.

Nothing specific today expect we feel like we've got the right solution between our analytics platform and the marketplace functionality to support the big players and emerging players as they increasingly focus on understanding how to optimize the modernization of their inventory.

We think we're in a very good spot to be a key participant catalyst here..

Your next question is from Gene Munster with Piper Jaffray..

Ross, can you talk a little bit about just competitively, I know that this becomes a bigger and bigger business, investors' anxiety about drawing some bigger competition increases. How should we think about that and separately as -- Mike, you mentioned that just in terms of how to think about growth in the business.

I just want to confirm that you said this, that you feel that your growth rate is coming more from existing customers versus new customers? If you could confirm that. And then also, if you can talk about at what point do you think we could see further new customers.

Is that 2015 or any thoughts on that?.

Thanks, Gene. I'll hit on, I think, some of the first questions and then let Mike step in on the others.

When we think about the competitive landscape, again, we've spent the last 4 to 5 years building what we think is very unique and defensible Call Analytics technology and a marketplace that is particularly well-suited to drive customer acquisition in mobile, and we don't really see other folks who are operating that functionality.

Where our competition lies is, these companies and advertisers do have existing customer acquisition programs, and so while they don't specifically offer the products we do, we're competing against their existing customer acquisition programs.

We think we have an advantage given that consumer adoption or transfer -- kind of transformation into mobile is really our sweet spot when you look at phone calls as the currency of the medium and our unique capabilities to understand, measure and drive more high-quality phone calls.

And so in that regard, that's really how we think about the competition currently. Beyond that, we continue to focus on and it seems to be kind of going in a virtuous direction, but getting advertisers to understand that they can buy the outcome and not the channel.

So focusing on high-quality phone calls rather than necessarily offline or online or search.

So the transformation of understanding and measuring the outcome versus placing media dollars by channel, combined with our performance-based solution centered on calls and mobile, against these incumbent programs is really how we see the competitive landscape and why we think we've got a unique window and advantage here.

Mike?.

And in terms of the second part of your question, Gene, talking about just the existing customer growth versus some of the new customer acquisition. In many cases, the new [indiscernible] acquisition programs are still very similar to how we brought on-board customers a year or 2, 3 years ago, where they start with trials.

And often, there are 3- to 6-month periods of time for $25,000 to $50,000 of spend budget. And one of the consistent themes that we're getting as part of those programs is the feedback of these are very good return on investments metrics that we're achieving as part of these trials.

Can you scale and move these budgets and still achieve these metrics? And as we have done that, that's what's created the opportunity for some of the expansion and growth of the budgets from some of our existing customers.

So a new customer that was on-board with us in 2011 or 2012, those are a lot of the ones that are expanding and growing in 2013 and this year. New customers in 2013 just by virtue of the mechanics are existing customers in 2014.

So the ones that we are on-boarding today, we very much believe and are hopeful that those will become some of the growth catalysts for us on a go-forward basis..

Yes. And Ross, maybe just wanted a kind of follow-up question on the competitive front, maybe, a more specific question is just how to think about Google, in particular.

I know that there is dynamics to that, is there anything you can tell us about how that's been evolving?.

Look, Google drives -- it has a lot of consumers engaged in mobile and we know calls are the primary outcome.

And so, applying our analytics to Google where our advertisers want us to provide that measurability and transparency has turned out to be a good opportunity for us and one that Google really values, since we're able to highlight the value that exists in the Google ecosystem. So historically, it's sub 10 percentage of our business.

With some of our customer growth and their focus on leveraging our solutions across all channels, it's grown to some degree. And Google so far has viewed us as the real catalyst and positive partner in that process and we see no shortage of opportunities to continue to work with them closely as part of our overall ecosystem..

Your final question is from John Campbell with Stephens Incorporated..

All right. So just generally speaking, just if we rewind the clock back to the tone of last year, you guys talked about a turn in the business or an inflection point basically, as you guys basically got a line item in the budget in the past, you guys were maybe in that miscellaneous bucket.

So just curious to see or to hear from you guys, any additional color on the budget planning cycle this year versus last, given you guys are basically going to put in place your revenue -- basically put in place your revenue for next year over the next several months.

So just curious to hear; just a, are you guys getting a better seat or a louder voice at the table of contract negotiations? And then b, just from the initial conversations you're having, are you hearing that some of your guys are shifting more share to the online channel versus offline?.

Look, again, all good questions. And if you go back to the end of last year, which of course, in our world feels like it was about a decade ago.

The years played out, I think, in a manner pretty consistent with how we were communicating based on increased visibility, increased growth, kind of the whole emergence of mobile being a catalyst for people to really have to understand calls.

This is a problem that's getting bigger and bigger, which is good news for us, in terms of people needing to reach out and find a solution that we're well-suited to deliver against. And so as we go into this year and that planning cycle really hits in the fall, September, October towards November, December.

We feel good about where we are with our existing customers. We feel good about the relationships we've added and are building in the course of the year and our ability to step in and have dialogue around strategic planning for 2015. So right now, things are playing out in a manner that I think is pretty consistent with what we messaged last year.

And hopefully, we continue to stair-step up as we grow the roster of big advertisers who have a lot of potential..

Got it. And then just as a follow-up.

Can you guys talk a little bit about the call volume growth like per client if you just think about on a same-store basis like year-over-year and if that's picking up, just talk a little bit more about the conversion rate as you scale up?.

So this is Mike. Thanks for the question, John. I think for the most part, it's all volume pickup. It's not pricing movement. It's volume pickup that's driving some of the increase from a revenue perspective. And in terms of same-store sales, that type of analogy was return on investment.

I think one of the reasons that the advertisers are expanding their budget is they're getting at least the same, very good return on investment, if not better.

And some of that is attributable to just the product and the progress that we're making and giving the advertisers the measurement as it relates to new customer acquisition and tying that into the conversations that are being driven by their businesses and their call centers that they're having with the consumers and engaging them in a better fashion and understanding all the intelligence elements around that..

And there are no further questions at this time.

Do you have any closing comments?.

Just briefly want to thank everybody for their participation today and we look forward to keeping you posted on our progress. Thanks again..

Thank you, everyone, for joining today's conference call. You may now disconnect..